Cash Flow and Financial Planning

1) Allocation of the historic costs of fixed assets against the annual revenue they generate is
called ……………………?……………………
A) arbitraging
B) securitization
C) depreciation
D) amortization

2) In general, ……………………?…………………….
A) a longer depreciable life is preferred, because it will result in a faster receipt of cash flows
B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows
C) a shorter depreciable life is preferred, because management can then purchase new assets, as
the old assets are written off
D) a longer depreciable life is preferred, because management can postpone purchasing new
assets, since the old assets still have a useful life

3)A firm's operating cash flow (OCF) is defined as ……………………?…………………….

A) gross profit minus operating expenses
B) gross profit minus depreciation
C) EBIT times one minus the tax rate plus depreciation
D) EBIT plus depreciation

4) Which of the following is an example of noncash charges?

A) depreciation
B) accruals
C) interest expense
D) dividends paid

5) Which of the following is a source of cash flows?

A) increase in marketable securities
B) increase in accounts payable
C) decrease in notes payable
D) repurchase of stock

6) In the statement of cash flows, retained earnings are handled through the adjustment of
……………………?…………………….
A) "Revenue" and "Cost" accounts
B) "Current Assets" and "Current Liabilities" accounts
C) "Depreciation" and "Purchases" accounts
D) "Net Profits After Taxes" and "Dividends Paid" accounts
7) The cash flows from operating activities section of the statement of cash flows includes
……………………?…………………….
A) dividends received
B) cost of raw materials
C) dividends paid
D) stock repurchases

8) The cash flows from operating activities section of the statement of cash flows includes
……………………?……………………..
A) labor expense
B) proceeds from the sale of fixed assets
C) dividends received
D) dividends paid

9) The cash flows from financing activities section of the statement of cash flows includes
……………………?……………………...
A) labour expense
B) cost of raw materials
C) purchase of long-term assets
D) dividends paid

10) The three categories of a firm's statement of cash flows are ………?…………….
A) cash flow from operating activities, cash flow from investment activities, and cash flow from
noncash activities
B) cash flow from operating activities, cash flow from noncash activities, and cash flow
from financing activities
C) cash flow from equity activities, cash flow from investment activities, and cash flow from
financing activities
D) cash flow from operating activities, cash flow from investment activities, and cash flow
from financing activities

11) Which of the following is a cash inflow?

A) a decrease in accounts payable
B) a decrease in accounts receivable
C) an increase in dividend payment
D) a decrease in accrued liabilities

12) Which of the following line items of the statement of cash flows must be obtained from the
income statement?
A) accruals in current liabilities
B) interest expenses
C) accounts receivable
D) cash dividends paid on both preferred and common stocks
13) Cash flows directly related to production and sale of a firm's products and services are called
……………………?……………………...
A) cash flow from operating activities
B) cash flow from investment activities
C) cash flow from financing activities
D) cash flow from equity activities

14) Cash flows associated with the purchase and sale of fixed assets and business interests are
called cash flow from ……………………?……………………...
A) operating activities
B) investment activities
C) financing activities
D) equity activities

15) Cash flows that result from debt and equity financing transactions, including incurrence and
repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends
or repurchase stock are called cash flow from ……………………?……………………...
A) operating activities
B) investment activities
C) financing activities
D) miscellaneous activities

16) A corporation sold a fixed asset for $100,000. This is ………………?……………………...

A) an investment cash flow and a source of funds
B) an operating cash flow and a source of funds
C) an operating cash flow and a use of funds
D) an investment cash flow and a use of funds

17) A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is
considered as ………………..?........................
A) an investment cash flow
B) a financing cash flow
C) a financing cash flow and investment cash flow, respectively
D) a financing cash flow and operating cash flow, respectively

18) Which of the following is a cash flow from financing activities?

A) purchase of a long-term asset
B) decrease in accounts payable
C) increase in accounts payable
D) repurchasing stock

19) Which of the following represents a cash flow from operating activities?
A) dividends paid
B) increase or decrease in current liabilities
C) increase or decrease in fixed assets
D) repurchasing stock
20) For the year ended December 31, 2019, a corporation had cash flow from operating activities
of -$10,000, cash flow from investment activities of $4,000, and cash flow from financing
activities of $9,000. The statement of cash flows would show a ……………?………………….
A) net decrease of $3,000 in cash and marketable securities
B) net decrease of $5,000 in cash and marketable securities
C) net increase of $3,000 in cash and marketable securities
D) net increase of $5,000 in cash and marketable securities

21) For the year ended December 31, 2014, a corporation had cash flow from operating activities
of $20,000, cash flow from investment activities of -$15,000, and cash flow from financing
activities of -$10,000. The statement of cash flows would show a ……………?………………….
A) net increase of $5,000 in cash and marketable securities
B) net decrease of $5,000 in cash and marketable securities
C) net decrease of $15,000 in cash and marketable securities
D) net increase of $25,000 in cash and marketable securities

22) A firm has just ended the calendar year making a sale in the amount of $200,000 of
merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full
for the merchandise during the year, it has yet to collect at year end from the customer. One
possible problem this firm may face is ……………………?……………………...
A) low profitability
B) insolvency
C) inability to receive credit
D) high leverage

23) Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000,
operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%.
A) $35,000
B) $700,000
C) $70,000
D) $45,000 operating profit (100,000)x tax rate (.3)=30,000
100,000-30,000=70,000

24) Calculate a firm's free cash flow if it has net operating profit after taxes of $60,000,
depreciation expense of $10,000, net fixed asset investment requirement of $40,000, a net
current asset requirement of $30,000 and a tax rate of 30%.
A) $0
B) $30,000
C) -$30,000
D) $60,000
25) Identify each expense or revenue as a cash flow from operating activities (O), a cash flow
from investment activities (I), or a cash flow from financing activities (F).
Administrative expenses

Rent payment (O)

Interest on a note payable (f)
Sale of equipment (o)
Dividend payment(I)
Stock repurchase (f)
Sale of finished goods (O)
Labor expense(O)
Sale of a bond issue (f)
Repayment of a long-term debt(F)
Selling expenses (O)
Depreciation expense (O)
Sale of common stock(F)
Purchase of fixed assets(I)

26) The financial planning process begins with ……………………?……………………...

financial plans that in turn guide the formation of ……………………?……………………...
plans and budgets.
A) short-term; long-term
B) short-term; short-term
C) long-term; long-term
D) long-term; short-term

27) Which of the following would be the least likely to utilize a cash budget?
A) top management
B) middle management
C) public investors
D) lenders

28) ……………………?……………………... consider proposed fixed-asset outlays, research

and development activities, marketing and product development actions, capital structure, and
major sources of financing.
A) Short-term financial plans
B) Long-term financial plans
C) Pro forma income statements
D) Cash budgeting

29) In general, firms that are subject to a high degree of …………?............................, relatively
short production cycles, or both, tend to use shorter planning horizons.
A) profitability
B) financial certainty
C) operating uncertainty
D) financial planning
30) Once sales are forecasted, …………?………………… must be generated to estimate
required raw materials.
A) a production plan
B) a cash budget
C) an operating budget
D) a pro forma statement

31) The …………?………………… is a financial projection of a firm's short-term cash

surpluses or shortages.
A) operating financial plan
B) cash budget
C) strategic financial journal
D) capital assets journal

32) The primary purpose in preparing a cash budget is …………?………………….

A) to evaluate the intrinsic value of a financial assets
B) to estimate a firm's short-term cash requirements
C) for risk analysis
D) to estimate sales

33) An external sales forecast is based on …………?…………………..

A) the relationships between a firm's sales and certain key economic indicators such as GDP and
consumer confidence
B) a buildup, or consensus of sales forecasts through a firm's own sales channels
C) the prediction of a firm's sales over a given period through the analysis of the sales trends of
its competitors.
D) developing the pro forma income statement to forecast sales and then express the various
income statement items as percentage of projected sales

34) An internal forecast is based on …………?…………………..

A) a buildup, or consensus, of sales forecasts through a firm's own sales channels, adjusted for
additional factors such as production capabilities
B) the relationships between a firm's sales and certain economic indicators
C) the prediction of a firm's sales over a given period through surveys sent to financial analysts
D) developing the pro forma income statement to forecast sales and then express the various
income statement items as percentage of projected sales

35) A firm's final sales forecast is usually a function of …………?…………………..

A) its net income
B) the salesperson's estimates of demand
C) internal and external factors in combination
D) its accounts receivable

36) The key input to the short-term financial planning process is …………?…………………..
A) the audit report
B) the pro forma balance sheet
C) the sales forecast
D) the pro forma income statement
37) A firm has projected sales in May, June, and July of $100, $200, and $300, respectively. The
firm makes 20 percent of sales for cash and collects the balance one month following the sale.
The firm's total cash receipts in July is …………?…………………..
A) $220
B) $200
C) $180
D) $140

38) In preparing a cash budget, the …………?..............................seasonal and uncertain a firm's

cash flows, the …………?.............................the number of budgeting intervals it should use.
A) more; greater
B) more; fewer
C) less; greater
D) less; fewer

39) The key input to any cash budget is …………?…………………..

A) the sales forecast
B) the production plan
C) the pro forma balance sheet
D) the current tax laws

40) Of the following components of a cash budget, generally the easiest to estimate would be the
…………?…………………..
A) cash sales
B) cash receipts
C) cash disbursements
D) month-to-month short-term borrowing

41) Cash disbursements include …………?…………………..

A) amortization expense
B) rent payments
C) depreciation expense
D) depletion

42) A projected excess cash balance for the month may be …………?…………………..
A) financed with short-term securities
B) financed with long-term securities
C) invested in marketable securities
D) invested in long-term securities
43) A firm has actual sales in November of $1,000 and projected sales in December and January
of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40
percent of its sales one month following the sale, and collects the balance two months following
the sale. The firm's total cash receipts in November is …………?…………………...
A) $1,000
B) $100
C) $700
D) $400

44) In April, a firm had an ending cash balance of $35,000. In May, the firm had total cash
receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance
required by the firm is $25,000. At the end of May, the firm had …………?…………………....
A) an excess cash balance of $25,000
B) an excess cash balance of $0
C) required financing of $10,000
D) required financing of $25,000

45) In October, a firm had an ending cash balance of $35,000. In November, the firm had a net
cash flow of $40,000. The minimum cash balance required by the firm is $25,000. At the end of
November, the firm had …………?…………………....
A) an excess cash balance of $50,000
B) an excess cash balance of $75,000
C) required total financing of $15,000
D) required total financing of $5,000

46) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of
$8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning
cash balance of $500. At the end of August, the firm …………?………………….....
A) required total financing of $500
B) had an excess cash balance of $5,500
C) had an excess cash balance of $500
D) required total financing of $2,500

47) Which of the following represents a way of coping with uncertainty in a cash budget?
A) careful estimation of cash budgets outputs
B) developing a pro forma income statement to forecast sales and then express the various
income statement items as percentage of projected sales
C) always using the prior year's data for estimates of the future
D) using scenario analysis, or "what if" approach, to analyze cash flows under a variety of
circumstances
48) Thomas Jac, a financial analyst for Value Supermarkets, has prepared the following sales and
cash disbursement estimates for the period August through December of the current year.

Ninety percent of sales are for cash, the remaining 10 percent are collected one month later. All
disbursements are on a cash basis. The firm wishes to maintain a minimum cash balance of $50.
The beginning cash balance in September is $25. Prepare a cash budget for the months of
October, November, and December, noting any needed financing or excess cash available.

49) MCM Manufacturing expects stable sales through the summer months of June, July, and
August of $500,000 per month. The firm will make purchases of $350,000 per month during
these months. Wages and salaries are estimated at $60,000 per month plus 7 percent of sales. The
firm must make a principal and interest payment on an outstanding loan in June of $100,000. The
firm plans a purchase of a fixed asset costing $75,000 in July. The second quarter tax payment of
$20,000 is also due in June. All sales are for cash.
(a) Construct a cash budget for June, July, and August, assuming the firm has a beginning cash
balance of $100,000 in June.
(b) The sales projections may not be accurate due to the lack of experience by a newly-hired
sales manager. If the sales manager believes the most optimistic and pessimistic estimates of
sales are $600,000 and $400,000, respectively, what are the monthly net cash flows and required
financing or excess cash balances?

50) Marry's Hamburgers wants to prepare a cash budget for months of September through
December. Using the following information, prepare the cash budget schedule and interpret
the results.
∙ Sales were $50,000 in June and $60,000 in July. Sales have been forecasted to be $65,000,
$72,000, $63,000, $59,000, and $56,000 for months of August, September, October, November,
and December, respectively. In the past, 10 percent of sales were on cash basis, and the
collection were 50 percent in the first month, 30 percent in the second month, and 10 percent in
the third month following the sales.
∙ Every four months (three times a year) $500 of dividends from investments are expected.
The first dividend payment was received in January.
∙ Purchases are 60 percent of sales, 15 percent of which are paid in cash, 65 percent are paid
one month later, and the rest is paid two months after purchase.
∙ $8,000 dividends are paid twice a year (in March and September).
∙ The monthly rent is $2,000.
∙ Taxes are $6,500 payable in December.
∙ A new hamburger press will be purchased in October for $2,300.
∙ $1,500 interest will be paid in November.
∙ $1,000 loan payments are paid every month.
∙ Wages and salaries are $1,000 plus 5 percent of sales in each month.
∙ August's ending cash balance is $3,000.
∙ They would like to maintain a minimum cash balance of $10,000.
51) The primary purpose in preparing pro forma financial statements is …………?…………
A) for cash planning
B) to ensure the ability to pay dividends
C) for risk analysis
D) for profit planning

52) …………?.................are projected financial statements.

A) Pro forma statements
B) Statements of retained earnings
C) Cash budgets
D) Cash flow statements

53) The key inputs for preparing pro forma income statements using the simplified approaches
are the …………?………….
A) sales forecast for the preceding year and financial statements for the coming year
B) sales forecast for the coming year and the cash budget for the preceding year
C) sales forecast for the coming year and financial statements for the preceding year
D) cash budget for the coming year and sales forecast for the preceding year

54) In the next planning period, a firm plans to change its policy of all cash sales and initiate a
credit policy requiring payment within 30 days. The statements that will be directly affected
immediately are the …………?………….
A) pro forma income statement, balance sheet, and cash budget
B) pro forma balance sheet and cash budget
C) cash budget and statement of retained earnings
D) pro forma income statement and pro forma balance sheet

55) A firm plans to retire outstanding bonds in the next planning period. Which of the following
gets affected?
A) pro forma income statement and pro forma balance sheet
B) previous year income statement and previous year balance sheet
C) previous year income statement and statement of retained earnings
D) pro forma income statement and proxy statement

56) A firm plans to depreciate a five year asset in the next planning period. The statements that
will be directly affected are the …………?…………..
A) pro forma income statement, pro forma balance sheet, and cash budget
B) pro forma balance sheet, cash budget, and statement of retained earnings
C) cash budget and pro forma balance sheet
D) pro forma income statement and pro forma balance sheet

57) The percentage-of-sales method of preparing pro forma income statements assumes that
…………?…………...
A) sales are fixed
B) all costs inversely vary with sales
C) all costs are independent
D) all costs are variable
58) The best way to adjust for the presence of fixed costs when using the simplified approach for
pro forma income statement preparation is …………?…………....
A) to proportionately vary the fixed costs with the change in sales
B) to adjust for projected fixed-asset outlays
C) to disproportionately vary the costs with the change in sales
D) to break the firm's historical costs into fixed and variable components

59) Under the judgmental approach for developing a pro forma balance sheet, the "plug" figure
required to bring the statement into balance may be called the …………?………….....
A) cash balance
B) retained earnings
C) external financing required
D) accounts receivable

60) The …………?………….... method of developing a pro forma balance sheet estimates
values of certain balance sheet accounts while external financing is used as a balancing, or plug,
figure.
A) percent-of-sales
B) accrual
C) judgmental
D) cash

61) A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a
preliminary statement—called the external financing required—of $230,000. The firm should
prepare to …………?………….....
A) repurchase common stock totaling $230,000
B) arrange for a loan of $230,000
C) do nothing; the balance sheet balances
D) invest in marketable securities totaling $230,000

62) A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a
preliminary statement—called the external financing required—of negative $250,000. The firm
may prepare to …………?………….....
A) sell common stock totaling $250,000
B) arrange for a loan of $250,000
C) do nothing; the balance sheet balances
D) invest in marketable securities totaling $250,000
 Table 1

The financial analyst for Sportif, Inc. has compiled sales and disbursement estimates for the
coming months of January through May. Historically, 75 percent of sales are for cash with the
remaining 25 percent collected in the following month. The ending cash balance in January is
$3,000.

63) The total cash receipts for April are …………?.....................(See Table 1)
A) $5,000
B) $7,500
C) $9,250
D) $10,000

75% of April sales + 25% of March sales = 75% of 10000 + 25% of 10000 = 10000

64) The net cash flow for February is …………?......................(See Table 1)

A) -$1,250
B) -$1,000
C) $5,750
D) $750
Net cash flow = cash receipts - cash disbursements= ( 75% * 6000 + 25% * 5000 ) - 7000 = - 1250

65) The ending cash balance for March is …………?......................(See Table 1)

A) $250
B) $6,750
C) $2,500
D) $500

66) The ending cash balance for February is …………?......................(See Table 1)

A) $750
B) $1,750
C) $2,500
D) -$1,000

67) At the end of May, the firm has an ending cash balance of …………?.......................(See
Table 1)
A) $9,000
B) $16,750
C) $14,250
D) $12,000
68) The firm has a total financing requirement of …………?.....................for the period from
February through May. (See Table 1)
A) $ 0
B) $1,750
C) $1,250
D) $ 750

69) If a pro forma balance sheet dated at the end of May was prepared from the
information presented, the marketable securities would total …………?...(See Table 1)
A) $9,000
B) $9,500
C) $12,000
D) $16,750

70) A weakness of the percent-of-sales method of preparing a pro forma income statement is
…………?………….......
A) that it forecasts income and then expresses the various income statement items as percentages
of projected income.
B) the assumption that the firm faces linear total revenue and total operating cost functions
C) the assumption that the firm's past financial condition is an accurate predictor of its future
D) the difficulty faced in calculation and preparation of such statements

71) Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma
financial statements will tend to …………?………….......
A) understate profits when sales are decreasing
B) understate profits when sales are increasing
C) overstate profits when sales are increasing
D) neither understate nor overstate profits

72) If transportation costs were a huge portion of a firm's expenses and the firm expected gas
prices to increase greatly in the next year, then in preparing its pro forma income statement the
firm should .
A) use the percentage of transportation costs from last year's sales
B) decrease the percentage of transportation costs from the percentage of last year's sales
C) increase the percentage of transportation costs from the percentage of last year's sales
D) double the percentage of transportation costs from the percentage of last year's sales
73)
Income Statement
HNN Company
For the Year Ended December 31, 2019

HNN estimates its sales in 2020 will be $3 million. Interest expense is expected to remain
unchanged at $70,000, and the firm plans to pay cash dividends of $140,000 during 2020. Use
the percent-of-sales method to prepare a pro forma income statement for the year ended
December 31, 2020, based on the 2019 income statement shown above.

74) The Wirl-Wind Company of America is trying to plan for the next year. Using the current
income statement and balance sheet given in Table 2, and the additional information provided,
prepare the company's pro forma statements.
∙ Sales are projected to increase by 15 percent.
∙ Total of $75,000 in dividend will be paid.
∙ A minimum cash balance of $650,000 is desired.
∙ A new asset for $50,000 will be purchased.
∙ Depreciation expense for next year is $50,000.
∙ Marketable securities will remain the same.
∙ Accounts receivable, inventory, accounts payable, notes payable, and accruals will
increase by 15 percent.
∙ $30,000 new issue of bond will be sold.
∙ No new stock will be issued.
 Table 2

Balance Sheet
Wirl Wind Company